Deconstructing Austerity I. Money

The narrative of austerity as proposed by Osborne and his cronies is that our huge national debt is the responsibility of feckless Labour politicians and their uncontrolled spending. An examination of the data from the Debt Management Office shows clearly that this is nonsense (this is shown in the graphic and discussed in more detail in my paper 'Who Owes Whom?'). The many billions that were spent as an emergency to prop up failing banks and prevent the financial system from crashing are the real explanation for the huge increase in the public debt. Osborne is a liar by omission because he will not discuss whether he would seriously have refused to invest this money and allow cashpoints to seize up.

 

The reality is that under Osborne far more money has been poured into preventing the cardiac arrest of the economy that results from a lack of circulating money. This is the money created through quantitative easing and the difference between it and what was spent by Darling during the crisis is that the QE money was direct credit creation whereas the money spent by Darling was generated through the sale of bonds and hence features in our national debt.

Since 2009 £375 billion has been created directly by the Bank of England and poured into financial institutions. They have greedily hoovered up this money and paid it to shareholders as well as improving their balance sheet position. They have barely loaned any of it to businesses or invested it in the economy, although the government could have used it for such direct investment, as I argued at the time. This explains why the wealthy and those with interests in finance are flourishing while the rest of us are suffering austerity. The £80 billion created for Funding for Lending has similarly not resulted in an increase in debt and has also been kidnapped by the banks rather than being fed into the real economy.

The Treasury bonds that were bought during the quantitative easing programme are still sitting inside the Bank of England presumably with a big label saying 'do not touch'. If they were to be cancelled, which they could be since they are IOUs issued on our behalf, nearly a third of our national debt would be wiped out in an instant. What a marvellous way of reducing the burden of austerity - or not depending on your political objectives.

These are political choices and hence the narrative of austerity politics that there is no alternative is simply a lie. Darling could have created money directly to save the banks; Osborne could create money directly now for investment in a renewable energy transition. Darling's unwillingness to resort to direct credit creation in the early days is hard to fathom and perhaps resulted from a failure of understanding. Osborne's refusal now to engage in any type of monetary policy that would assist the real economy is a consequence of his desire to use the financial crisis to achieve his long-term policy goal of destroying the public sector.

Almost without challenge Osborne portrays himself as the saviour of the economy while Cameron claims deceitfully to have reduced the debt. The national debt is of course still increasing (see the Spectator graphic) and while the deficit is slightly decreasing we're way off Osborne's original projections. However, this is all smoke and mirrors since the Conservatives have no intention and no desire of reducing the national debt: it's far too useful to them politically.

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Owen Paterson: The Badger Bites Back

Since I was given the opportunity to respond to his inane remarks about fracking back in the summer I have taken an increasing interest in the escapades of Environment Secretary Owen Paterson, whose suggestion that his failed badger cull was the fault of the badgers has brought him greater public attention recently. When asked for that comment I had just eaten a particularly dreadful railway burger and so was feeling irritated before I even read his remarks, hence my suggestion that he was only a so-called environment secretary.

With the benefit of some reflection I actually feel my comment was well aimed, since the problem I have with Paterson is about what he thinks the environment means and therefore what it means to be the minister for it. Paterson is clearly taking a definition of ‘environment’ that is diametrically opposed to my own and one that exposes him out as a classic representative of the man-in-dominion approach to the natural world. This comes easily to those who have grown up owning large stretches of countryside and seeing it as a playground for them to cavort in and a place to shoot any creatures that might make their home there. A Green environment secretary would take the perspective of humans as part of that environment not an external, colonising force. Shifting from the view of land belonging to humans to the view of people belonging to the land was an important step in my ecological evolution.

Paterson’s increasingly strident attacks on the opponents of fracking, those who attempt to defend badgers, and to protect our environment against genetically modified crops have made it clear that Patterson has been Crosbied. Lynton Crosby's main influence on the government has been to persuade them to abandon any pretence of basing policy on scientific evidence or even to debate with their opponents at all. Instead the strategy is to go for full frontal assault on people who do not share their view, calling them wicked and shameful and suggesting that they revel in childhood blindness or the slow death of soft fluffy animals.

Paterson was clearly chosen for this role because of his fondness for seeing the environment as something to be exploited and a ‘wholly owned subsidiary’ of UK plc, rather than understanding that the economy is entirely dependent on the environment, as Herman Dally suggested an ecological approach to economics requires. Hence the NPPF (the coalition government's planning policy), with its presumption in favour of growth and an undebated and unrestrained support for fracking no matter what the environmental and social cost.

Paterson's suggestion that the badgers moved the goalposts was greeted with hilarity but is in fact one of his more sensible suggestions. If he could only begin to see parts of non-human nature as having agency and deserving respect we might see some improvement in his hitherto dire performance in protecting the environment.

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The Troika, the US Hedge Funds and the Diversion of Taxpayers' Money

A guest post by Stephan Lindner

Do you remember John Paulson? In 2007 he became famous for having the highest income of all hedge fund managers on Wall Street, because he bet against the US housing market. Not all of his deals were fair, to say it politely. Later the SEC investigated a deal called ABACUS 2007-AC1, for which Paulson told Goldman Sachs to create a CDO with bad subprime mortgages, so that he could bet against it. Goldman Sachs agreed 2010 to pay $550 million to settle with the SEC and a former vice president of Goldman Sachs, who was responsible for the deal inside of Goldman Sachs was found liable for fraud in front of a jury. With that single deal Paulson earned around $1 billion and never had to justify himself in front of a court. And now he tells the whole world, that he owns shares in two Greek banks, Piraeus Bank and Alpha bank. Reuters cites from a statement: ‘They have good management and we think the Greek economy is improving, which should benefit the banking sector.'


What does this management looks like? In Greece after the haircut the banks are more or less bankrupt and need to be recapitalized. Officially they are solvent thanks to the $50bn. they received from the troika, but most experts still estimate that the non-performing loans are still higher than the injected capital. Normally nobody would like to give capital to such banks. Here is the explanation the owner of Piraeus bank found for this situation: Reuters reported in summer 2012, that he used credit in his own bank to buy shares of his bank (read the full story here). In this New York Times article from June you can read even more of what the president of Piraeus bank did to make his bank grow during the crisis to become the biggest bank in Greece:


If you think you get into trouble if someone finds out about such business practices, you are wrong. Mr Salinas is still the President of Piraeus bank and the Greek Central Bank, which investigated all allegations, could find no evidence of wrongdoing. And they have the ideal informant: the president of the Greek central bank is a former vice president of Piraeus bank. So what happens to people who report about such practices in Greece? It isn’t pretty.

We might also ask how the troika did everything possible to make the buying shares of Greek banks as lucrative as possible? For each Euro someone invests in banks like Piraeus the troika pays an additional nine Euros, and if the share price aises to a certain level, the investor gets the right to buy this additional 90 per cent of shares, not for the then actual much higher price, but for the low price at which they made their first investment. Hurrah for the troika for making such lucrative deals with taxpayers’ money. Read the full explanation of the Paulson deal in todays blogpost of Yanis Varoufakis.

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Get a Life not just a Living Wage

I spent Saturday at a conference on the living wage organised by the regional TUC. It seems sad that you need to campaign for the right to earn enough money to live on but this is the reality of the living wage campaign. It was easy for me to agree with it since the Green party's policy is to raise the minimum wage to living wage of 60% of average earnings (currently around £8.10 per hour). The representatives from the Conservative and Labour parties present similarly supported and the living wage, although their parties do not have it as part of their national policy platform.

The idea that paying workers reasonably is good for everybody in the economy is neither new nor radical. It was the idea that enabled Ford's Detroit workers to buy the cars they were manufacturing, and forgetting this important lesson about capitalism is part of the explanation for the disastrous state of Detroit today.

My own presentation was focused on the living wage as a first step towards the end of wage slavery and needless to say I ranged rather more widely than the idea of bringing wages up to a liveable minimum. The beginning of my story was the way the Empire of Capitalism struck back at the end of the 1970s and the huge impact this had on the income dispersion. This is illustrated in the graphic taken from the work of Danny Dorling, which shows the share of total income going to the richest 1% of people between 1918 and 2005. The impact of trade-union activism and increased worker expectations is clear, as is the counter-effect of the Thatcherite ideology and attacks on union power.

My next graphic, based on ILO data, demonstrates clearly the importance of the Tina narrative in persuading workers not to ask for higher pay. It shows the clear indication of productivity increases on a global basis and the fact that the value generated by these workers working harder has been paid in profits rather than in wages. The argument around globalisation was used to persuade workers that they must compete with those in the lowest-paid economies in the world, and that asking for higher wages would destroy their own jobs. The inevitability of a race to the bottom when this ideology is played out is illustrated clearly in the graphic showing wage rates in different countries.

The great disparity of wages across EU countries which are part of the same single market is surely an issue that requires political debate. Why do we accept the very low pay offered to workers in central and eastern Europe? The deal we are offered is cheap goods rather than well-paid jobs, encouraging us to focus on our role as consumers rather than producers. The political economy underpinning this is not discussed but should surely be open for democratic debate.

The gains in wages illustrated in the earlier graphic were the result of solidarity across industries within a market. Globalisation undermined this but if we are to return to international solidarity in a globalised economy then surely a global minimum wage must be our ultimate demand, rather than a low wage, even if a living wage, subsidised by corporate welfare in the form of tax credits.

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How Rising House Prices Serve George's Friends in the City

There is a lot of controversy about the potential of the Help to Buy scheme to restart the housing bubble. I must say that I share this concern and am disturbed by the thought that Osborne may be deliberately reflating the value of the housing market to enable himself to portray the government as having tackled the problem of the deficit. To portray this policy as one of compassion for the homeless, and to encourage homeowners to celebrate rising house prices, as Cameron did on the Andrew Marr show yesterday, is disingenuous.

The PM  may sanguinely say people can afford these high-proportion mortgages but how much do interest rates need to rise until this is no longer the case? Cameron used the example of two people earning £20,000 or £25,000 per year and an average house price of £200,000. Leaving aside the 5% deposit to make the maths simple, the BBC mortgage calculator indicates that if interest rates rise to only 3% this couple will now be paying nearly £1000 a month to fund their mortgage.

Clearly the Tories think that offering young people homes financed through large amounts of debt will be politically popular, but the historic pattern in Britain of high and rising house prices and high rates of home ownership financed through a mortgage actually serves the financial sector much more than it serves British citizens. The explanation is simple: if your house costs twice as much you pay the bank twice as much in interest.

Useful data from the land registry indicates that the house price index has risen to more than 250 compared with January 1995 (the graphic indicates the ratio of prices to earnings during this period). At its peak before the crash the index reached nearly 300, which means that prices had undergone a threefold increase net of price inflation. As I teach my students, because of the compounding nature of interest, you are likely to pay back something like double the principal when you take out a loan over 25 years. This means that when house prices double, twice as much is paid back to financial corporations in interest. No wonder that those with friends in the City encourage us to celebrate house price rises.

House price inflation serves financiers and those who welcome the increasing value of their home as though it were an asset are missing the point. Those who still have mortgages are simply celebrating an increase in their housing costs; if their house is a home then they have no greater value from it even if its financial value has doubled. As it turns out in Britain the house is not a machine for living in, as Le Corbusier once suggested, but rather a machine for increasing bank profits.

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How Public is Public Money?

Of the many deceitful slogans which the Conservatives used when they came to power the 'bonfire of the quangos' has perhaps had the least justification in practice. A whole range of boards and partnerships are creeping back into existence, responsible for public money, but with no clear sense of how the public view will be represented or how they will be accountable to the public.

My own particular source of concern is the Local Enterprise Partnership. These were first mooted some 18 months ago, at which point they had no clearly defined powers and there was apparently no funding to accompany the establishment of such bodies. I remember thinking how unlikely it was that anybody would take on the challenge of local economic regeneration without any financial support. How foolish I was, and how cunning others were, because over time large amounts of public money have been promised to these bodies that those with foresight or perhaps inside information made their own.

The GLEPs are supposed to represent the country's 'natural economic areas', although there is no theoretical consideration about how such economic areas might be defined. The work that the LEPs might undertake is limited by the narrow and pro-growth conceptualisation of the problem we face according to the government rubric:

'Our economy is currently too dependent on a narrow range of industry sectors. We need an economy driven by private sector growth, with business opportunities evenly balanced across the country and between industries. We also need to reduce burdens for businesses, particularly in terms of lower tax levels, planning and other administrative burdens.'

While this is the rhetoric, the reality is that those who have always had their snouts in the trough of government subsidy to business have created structures to funnel public money in their direction, resulting in a map of meaningless and unplanned areas on the government website.

In Gloucestershire our LEP is called G1st LEP, G1st being an unsuccessful regional development company that has already received large amounts of money from the county but with no clear evidence of its having created jobs or brought prosperity. But it cleverly included the letters LEP in its name, built a new website, and was accepted by the Business Secretary as being the regeneration body for the whole of our county. At this stage, remember, there was no indication that money was coming and so it had no serious competitors.

But money has certainly followed and with increasing speed since the publication of the Heseltine report No Stone Unturned--In Pursuit of Growth, a report which has only proved that under those stones lurk a regiment of people who have made a career of parroting the same pro-growth, pro-business catechism without the need for a track-record of success. All money to be invested in regeneration by central government, or £2 billion of it in 2015-16, will now be funneled through these bodies. Yet there has been no opportunity for the public to become involved in discussions about how they might like to see regeneration happen, whether economic growth is in fact beneficial for local communities, whether we might focus on resilience and sustainability instead, or whether bioregions might be better natural economic areas than the curious regions illustrated in the map.

In Stroud we are particularly angry that money which was originally our money is now to be sent to the LEP, to be controlled by people with no democratic authority over this money, and we have to make a case to have some of it spent in our area. When the government cut our central funding grant they told us that in future we would receive money through a New Homes Bonus, already requiring us to build new houses in order to be properly funded. But now 40% of this New Homes Bonus will go to the LEP directly and we will not see any of it back unless we subscribe to the sort of view of economic development that this unaccountable body dictates. There is also talk of funding for further education institutions similarly passing through the LEP before being received by them.

Martin Whiteside, one of our district councillors here in Stroud, has referred to the birth of the GLEP as the immaculate reconception of the quango and, while we feel the parentage of our county body is particularly unclear, the accountability of these bodies that will use public money according to their own political priorities and without proper accountability should be questioned everywhere that LEPs lurk.

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What Price Democracy?

The politics of austerity has many political objectives but an important one you learn about quickly as a local councillor is its use as a mantra to incapacitate you. Anything you might want to do cannot be done, you are told, because we are living in a time of austerity and nothing can be afforded. With many Tory councillors in Stroud this appears to extend to democracy, which itself must be undermined and diminished because it is just too expensive.

In Stroud we are presently being subjected to a boundary review, triggered because one of our wards had slightly more than the 10% above the average number of voters per representative that is considered acceptable. So the Local Government Boundary Commission for England has fallen on our heads to undertake a review (curiously there is no problem with funding their work in spite of the austerity we hear of daily). While you might expect them to begin their work with objectives such as improving local democracy, enhancing citizen participation, or making representatives more accountable, in fact they have one aim: to reduce the number of councillors.

This caused me to question how well we are represented compared to our European neighbours: how much do we, as the home of democracy and children of the mother of parliaments, invest in our elected representatives? You will be shocked to read the comparisons in a report carried out recently by academics at Birmingham University. In France there are 118 citizens per elected member, which rises to around 600 in Italy and Spain, and 1075 in Greence. In the UK it is 2603: the largest number of any EU country. We are the least well represented of all, and yet the politics of austerity is being used to reduce our representation even further.

Anecdotally I have also received a lot of evidence about the disastrous levels of connection between citizens and their councils in some of the vast new unitary authorities that have been introduced under the Tory aegis. In both Wiltshire and Cornwall people report that they have no idea who to contact about local services and that the geographical areas they are supposed to identify with make no sense to them. The mantra of austerity is matched by the chorus of complaints about the quality of politicians, yet how can local politicians perform well when the areas they represent make no sense and are too vast to be comprehended?

I have reached a point of fury in debates over the cost of democracy when I have to bite my tongue to stop myself pointing out that Mussolini may have appeared cheap but the less-than-immediate costs were rather higher. The fact that this thought even occurs suggests the desperate state of our democracy and the way the politics of austerity is being used to undermine it further.
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